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CA10-2 (Accounting for Self-Constructed Assets)

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Asked: Aug 11th, 2015

Question description

CA10-2 (Accounting for Self-Constructed Assets) Troopers
Medical Labs, Inc., began operations 5 years ago producing stetrics, a new type
of instrument it hoped to sell to doctors, dentists, and hospitals. The demand
for stetrics far exceeded initial expectations, and the company was unable to
produce enough stetrics to meet demand.

The company was manufacturing its product on equipment that
it built at the start of its operations. To meet demand, more efficient
equipment was needed. The company decided to design and build the equipment,
because the equipment currently available on the market was unsuitable for
producing stetrics.

In 2014, a section of the plant was devoted to development
of the new equipment and a special staff was hired. Within 6 months, a machine
developed at a cost of $714,000 increased production dramatically and reduced
labor costs substantially. Elated by the success of the new machine, the
company built three more machines of the same type at a cost of $441,000 each

Instructions

(a) In general,
what costs should be capitalized for self-constructed equipment? (b) Discuss
the propriety of including in the capitalized cost of self-constructed assets:

(1) The increase in overhead caused by the self-construction
of fixed assets. (2) A proportionate share of overhead on the same basis as
that applied to goods manufactured

for sale. (c) Discuss
the proper accounting treatment of the $273,000 ($714,000 2 $441,000) by which
the cost of

the first machine exceeded the cost of the subsequent machines.
This additional cost should not be considered research and development costs.